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Kim North: Three-pronged attack on UK retirement debt

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The hapless Mr Micawber from Charles Dickens’s David Copperfield famously said: “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound nought and six, result misery.” This is a truism of which Dickens, who as a youth left school to work in a factory when his father was incarcerated in a debtors’ prison, was only too well aware.

Today I encourage financial services companies to help British people avoid falling into debt in retirement. We should look after our elderly. However, according to YouGov research for Old Mutual Wealth, almost a third of people head into retirement with debt, owing an average of £34,500.

A fifth of older people have debts of more than £50,000, with the most common being mortgage debt: at retirement, 21 per cent of people still owe money on their homes. This is followed by credit or store cards debt and unsecured loans.

According to the Association of British Insurers, £4.7bn has been withdrawn under pension freedoms. But despite 19 per cent of people using a portion of that money to pay off debt, more than half of those with debt at the point of retirement remain in the red.

I believe the solution to lessening debt in retirement is three-pronged.

The FCA should lessen regulation on financial advisers now the RDR’s “raising the bar” has settled in. Instead, product regulation should be raised to a similar level to other countries in Europe. This could potentially stop products being launched such as interest-only mortgages, which have led to thousands of people still having to pay for their homes after they retire.

Life companies, banks and other providers such as Sipp providers should give guidance on pension freedoms, including longevity, income tax and inheritance tax, and detailed information on the products on offer. This information could be provided via a call centre using telephones or Skype or through a website with interactive tools. My view is that this could replace the Citizens Advice side of Pension Wise.

Providers that offer retirement products should take more responsibility. For example, the man who took his entire pension as cash in this tax year  in order to purchase seven buy-to-let properties, not appreciating that a higher rate tax would be due, should have been stopped. Somebody, somewhere allowed this individual to take this money with no taxation guidance.

We need increased education on pensions at retirement, especially through auto-enrolment. Having collected all auto-enrolment providers’ product information, only a handful make any quality reference to taking the pension in retirement, as it is all about the “on boarding”.

Dickens’s David Copperfield also reminds us “a man must take the fat with the lean; that’s what he must make up his mind to, in this life”. Come on, pension companies and banks: use your manpower and technology to help investors understand what is going on throughout the entire term of the pension, not just at the end.

Kim North is managing director at Technology and Technical 

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. I do find it ironic that the pensions Industry is worrying about people taking all their pension fund in cash to maybe Invest elsewhere. Having been trapped inside a high charging poor performing product for potentially up to 4.5 decades the retiree has traditionally then been tricked into an in house annuity with no chance of changing their minds or more recently a roller coaster drawdown product. Osbourne I think saw that the Industry was never going to offer value and so he broke the stranglehold Pensions companies had on people’s money. Now if they want to hold on to their billions they have to compete.
    The pensions Industry should offer the retiree something worth having or stop whinging that they are at last getting out of pensions jail and going somewhere else, even if it is just a bar in Marbella.

  2. David Sime ~ The reason why so many people are “tricked” into buying a poor-rate annuity is YET ANOTHER failure of regulation, namely banning providers from quoting ANY annuity figures unless they happen to be particularly advantageous ones based on GAR’s. That would force people to shop around, even if they took (and had to pay for) only very basic/limited advice, i.e. all I want you to find for me is the best annuity rate with, perhaps, some guidance on the best structure. Why has the FCA constantly ignored all calls for this?

    As for Ms. North’s article, notable by its absence is any proposal to cap unsecured borrowing, for which I have suggested a limit of 3m net income. Isn’t this an obvious first step, given the multi-trillion pounds of such debt carried by the UK population?

    As for interest-only mortgages, I don’t agree that these should be banned altogether but I would agree with a proposal that they should be limited to the first five years of a mortgage.

    And yes, we certainly do need more education about the dangers of not saving long term towards retirement. It, along with much else, should be part of the national education curriculum so that people learn about such things from as early an age as possible. By the time the financially illiterate are of an age at which they qualify for an AE RBS, they may already be in a financial hole from which it’s going to be very difficult to dig themselves out.

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